Comparative market curb appeal gross living area
analysis
This chapter begins with a discussion of the differences and similarities between a formal appraisal and a comparative market analysis (CMA). Sources of information required to prepare the analysis properly are shown. Because the appraiser should use only similar properties in the analysis, one section of this chapter shows the common elements of comparison and discusses how to adjust for differences. Examples of computer generated CMAs are included. The chapter finishes with a case study covering CMA preparation. Once you have completed this chapter, you should be able to:
Real estate licensees who are involved in a transaction, either as a listing agent or selling agent normally should not perform an appraisal on the properties because they are not an objective party to the transaction. In the normal course of business, however, licensees are called upon to prepare a comparative market analysis for the seller or buyer as a means to help them make informed decisions on pricing a property. The estimate of value may not be called an appraisal
While the CMA closely follows the methodology used in the comparable sales approach to appraising, it should not be considered an appraisal. Some of the differences are that:
The CMA is most effective when prepared for pricing residential properties up to four units or for residential building lots in a subdivision. It is usually not appropriate for commercial or large residential income properties.
Many licensees arrange a visit prior to preparing a CMA to inspect and measure the property. This reduces the changes for a surprise at the time of presentation. Other licensees feel that a pre-presentation visit, while helpful, is not time effective. Licensees must make their own judgments as to which method will provide the best results.
PREPARATION OF A COMPARATIVE MARKET ANALYSIS
CATEGORIES OF COMPARABLES
A CMA normally presents three major categories of properties; sold within the previous 12 months, currently on the market, and listings which expired during the previous 12 months.
Sold within the previous 12 months. A review of properties which have sold within the previous 12 months provides sellers and buyers with very important information. What is an appraisal of the property likely to show? If there are some unusually high or low prices in the study, licensees should try to determine the reasons for the variance. The most recent sales are the most reliable, especially in a changing market. For the best marketing position, the seller should price the property just below the competition and just about recent sales.
Currently on the market. A review of the prices of properties currently on the market shows what owners of properties with similar characteristics are asking. Since buyers will normally select the property with the best price, all other things being equal, the seller should price his or her property appropriately. The seller must understand that the asking prices are typically higher than the price sellers will receive. Buyers should also request that a CMA be prepared, enabling them to see at a glance all the properties in the neighborhood that are on the market.
Expired during the previous 12 months. This is a list of properties which had been listed but which failed to sell. The most common reason is that the price was too high, considering the characteristics of the property. Sellers can readily see that buyers have a resistance to overpriced listings. It becomes clear to licensees that taking an overpriced listing is an exercise in futility which may generate ill will on the part of the seller.
Obtaining information about comparable properties which will be used in the report is usually easier if the property is in a recorded subdivision with many sales. It is more time-consuming if the property is in a rural area, because the location of comparable properties is less apparent. The best sources for such information include:
MLS® records are the most convenient and comprehensive method of obtaining information about listings and sales. MLS® computer records may be searched by address, subdivision, size, price or any other criteria which might show comparable properties. The major limitation with this source is the MLS® data usually only includes properties listed by a REALTOR®, and must be supplemented by another source.
Company files usually provide the most information of any of the sources, but are limited in scope because they show only those properties listed or sold by the company.
Public records show all recorded sales data, and are used to supplement the data. Many county property appraisers and clerks in Mississippi are now on-line through the MLS® or the Internet.
Other licensees are a good source of information on properties not normally listed in the MLS®, such as commercial, industrial or agricultural properties, or those in rural areas which don’t have a formal sharing service.
COMMON ELEMENTS OF COMPARISON
A CMA is useful for sellers and buyers only if it fairly reflects the interaction of supply and demand for a specific property. For that reason, it is important that all properties used in the report be similar to the subject property is size, age, amenities and location. Adjustments should be made for important differences such as swimming pools, condition, style and other items. There are many amenities which must be considered when making a comparison.
Location. Location is so important that only in unusual circumstances should the licensee use a property outside the neighborhood as a comparable. Even within the same neighborhood, location may result in significant differences in value. For example, a house next to a busy street normally has a lower value than a home in the subdivision’s interior.
TABLE 6.1 INFORMATION NEEDED TO PREPARE A COMPARATIVE MARKET ANALYSIS
Before starting on the analysis, the licensee will find it helpful to have the following information: | |
Information Necessary | Source(s) |
Owners’ names and address | Owner, public records, city directory |
Adequate description of the property | Owner’s deed, public records |
Lot size (frontage and depth) | Owner’s survey, recorded plat maps |
Number and size of rooms and total square footage | Inspection and measurement |
Building’s construction and age | Inspection, owner, tax appraiser’s office |
Information relative to the neighborhood (schools, churches, transportation) | Inspection, owner |
Current taxes | Owner’s tax bill, tax appraiser’s office |
Amount of existing financing | Owner’s records, mortgage status letter sent by licensee |
Utilities and average payments | Owner’s records, utility company records |
Appliances to be included in the transaction | Owner |
Personal property and fixtures included in the sale | Owner |
Zoning classification (especially important for vacant land) | City/county planning department |
Environmental hazards | Owner |
Size and shape of lot. A level site usually is more valuable than a sloping site. Also, bigger is usually better, and a rectangular lot often is more saleable than a pie-shaped lot. And because buyers value privacy, they pay more for that feature.
Landscaping. The licensee should evaluate trees and other greenery as to maturity and quality. The enhanced curb appeal of a well-landscaped home can add thousands of dollars in market value.
Construction quality. Variations in construction quality may result in significant differences in property value. In some cases, the difference may disqualify the property from use as a comparable.
Style. Generally, a home’s style should conform to that of the neighborhood. Substantial differences may result if the licensee uses the average square-foot prices of ranch homes to estimate a two-story home’s value. In this situation, the best comparables are other two-story homes.
Design. Design features are important mainly if some homes in an area have floor plans that are not functional or that are not accepted by the market. These are not good comparables for a home with a functional floor plan.
Age. In some established subdivisions, building sites are still available. The licensee should not use a new home as a comparable if preparing the CMA for a 20-year-old home.
Square feet of gross living area. All homes shown on the CMA should be comparable in size. Making dollar adjustments for small differences in size is relatively simple. However, the licensee should not compare a 2,500-square-foot home to a 5,100-square-foot home. Also, below-grade floor space is not considered gross living area (GLA) for most appraisals. It has less value than above built above-grade. The licensee must be careful to use only comparable properties. If the licensee must make a square-foot adjustment, the licensee should not also adjust for number of bedrooms or for a family room, for example. This may lead to a double adjustment for two items that really represent the same thing.
It is important that the licensee measure the home accurately. Using building plans or tax appraisal figures sometimes leads to costly errors. Gross living area normally is calculated by taking exterior measurements, eliminating the garage and any workshops. To practice calculate the square footage of gross living area in the home in Figure 6.1.
Number of rooms. The total room count should not include the foyer, bathrooms or basement. If a comparable property has four bedrooms and the subject has only three, the square-foot adjustment probably will account for any difference. However, if one of the properties is a two-bedroom home in a neighborhood of three-bedroom and four-bedroom homes, an additional adjustment may be necessary. The number of bathrooms can have a significant impact on value, particularly when one of the properties has only one bathroom.
Kitchen. The market resists a kitchen with inadequate counter and storage space. Also, poorly maintained counters and cabinet finish may cause a kitchen to appear outdated, compared to others in the neighborhood. The age and condition of appliances also affect value.
Other space. A screened-in porch or Florida room adds value even though it is not counted in gross living area. The licensee should adjust for this difference.
Condition. The licensee should make adjustments if the subject property needs repairs that the homeowner will not make.
Garage. The licensee should make adjustments when the subject’s garage or carport size differs from comparable properties’ garages or carports.
Other improvements. The licensee should evaluate swimming pools, decks, patios, storage sheds and other site improvements if they differ from comparable properties’ improvements.
FIGURE 6.1 CALCULATE THE SQUARE FOOTAGE OF GROSS LIVING AREA
ADJUSTMENT FOR DIFFERENCES
It would be ideal if comparable properties were identical to the subject property, but that situation rarely occurs. Therefore, the licensee may need to adjust for major differences so that the CMA does not mislead the seller and buyer. Making many adjustments for less significant items also may mislead and could give the appearance that the licensee is trying to “back in” to a predetermined value.
All adjustments are made to the comparable property. They may be remembered using the acronym CIA-CBS.
If the Comparable is Inferior, Add
If the Comparable is Better, Subtract
After the licensee makes adjustments he or she should reconcile each category of property (for sale now, sold, expired). While an appraiser usually reports a single dollar amount as the value, a real estate licensee often prefers to give a range of values. This allows the seller to list the property somewhat higher than the sold properties.
COMPUTER-GENERATED CMA’S
Several excellent software programs organize the data the licensee collects into an attractive presentation. Many MLS® service providers also offer built-in or optional software that allows REALTOR® members to download the comparable information directly into a listing presentation package. Few of these programs provide a way to make adjustments, however. The fact that a computer generates the information does not make the data correct. The licensee should select only those properties comparable to the subject property. Remember, garbage in, garbage out.
ATTACHMENTS TO CMA
Photos of comparable properties along with a plat map of the neighborhood make the CMA easier to understand. A photograph of the home is a gift the owner may remember for a long time.
CASE STUDY—COMPARATIVE
MARKET ANALYSIS
The following case study will illustrate the process a licensee uses to prepare a comparative market analysis. The licensee first must gather information necessary for a complete picture of the market in the neighborhood, including sales, listed properties and expired listings. The next step is to enter the information in the appropriate section of the form. The licensee must analyze the differences between the comparable property sales and the subject property, estimate the contribution value of the differences and make appropriate adjustments. Each sale can then be properly compared to the subject in a way that is understandable to the property owner.
GATHERING INFORMATION
The licensee first must collect information about the subject property. This is best accomplished by discussions with the owner and inspection of the property. Then, the licensee should get information about property sales, usually through the property appraiser’s records and MLS® records.
Getting information from the owner. You have just received a request from Wendell Kaski to discuss listing his family’s home. You ask for and receive some basic information.
Wendall J. Kaski and Sara Cook Kaski, HW
1810 Mayfair Road, Pascagoula, Mississippi
228-555-3496; 228-555-3487
Four bedrooms, two baths
Two-car garage, screened-in porch
7:20 this evening for an inspection of the property
Gathering information from the online tax rolls through the MLS® system. The tax rolls for Jackson County show the following information for the property:
Legal description: Lot 29, Block C, Astoria Park,
Unit 4—Jackson County
Property tax appraisal: $65,300
Annual taxes (including the
Homestead exemption): $877
Year built: 1977
Base area: 1,420 square feet (later verified
by physical measurement)
Total area: 1,985 square feet (include
garage)
Last sale: 1977
Last sale price: $37,100
Mortgage: Colonial Mortgage Company
A search of the tax records shows seven sales in the subdivision within the previous year, ranging from $68,000 to $78,000. Six of the seven sales were reported in the MLS®, which gives more information on which to base comparisons. The sales are shown in the first section of the CMA (see Figure 6.2.)
Four properties currently listed for sale in the MLS® are shown in the second section of the CMA. Three listings that expired within the last 12 months are listed in the third section.
Analysis of amounts contributed by amenities. Over time, in reviewing data on sold properties, we can estimate what a pool, a garage, an extra bedroom or a fireplace contributes to value. The matched pair analysis compares similar houses with and without a particular feature. The difference in price tends to indicate what the feature contributes in value. For instance, look at sales 1 and 2 in Figure 6.2. The only difference between the properties is a pool. Based on this
limited test and a comparison of the prices, a pool seems to add about $4,000 to value.
For the purpose of this CMA, we will assume that properties sold in the neighborhood show the following value contributions:
The CMA has been completed, with the exception of the adjustments shown above. Compare the subject property to each comparable property, and adjust the comparable property’s price. Then complete the analysis and estimate the market range for the property.
SUMMARY
A real estate licensee, in the normal course of his or her business, often prepares a comparative market analysis (CMA) in order to give an opinion of value. The CMA, while not an appraisal, uses the same method of comparison. It is most effective when used for single-family homes and multifamily residences up to four units.
The CMA form has three major sections: (1) properties sold within the previous 12 months; (2) properties currently on the market; and (3) properties listed during the previous 12 months that did not sell. The licensee must gather information before actually preparing the CMA. The information may be found in MLS® records, company files, and public records.
The licensee must consider differences between the comparable properties and the subject property. Important elements of comparison include location, age, size, condition and other improvements. The licensee should adjust for major differences so that the CMA is not misleading. The licensee can estimate the amount of adjustment by using matched pair analysis. If two properties have been sold recently with only one major difference, such as a fireplace, the difference in price is the item’s contribution to value. Once the licensee estimates the adjustment amount, he or she adjusts the comparable properties for differences from the subject property.
END-OF-CHAPTER QUESTIONS
Use the following information to answer questions 10 and 11.
House A sold for $90,000 and has 1,800 square feet with a pool, but no fireplace. House B sold for $87,000 and has 1,800 square feet with a fireplace, but no pool. House C sold for $85,000 and has 1,800 square feet with no pool or fireplace. House D sold for $95,000 and has 1,900 square feet with a fireplace, but no pool. The subject property has 1,900 square feet, a fireplace and a pool.